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Accounting 24e warren reeve duchac chapter 15 Comprehensive Problem 4 Investments and Fair Value Accounting: Comprehensive Problem 4 Selected transactions completed by Everyday Products Inc. during the fiscal year ending December 31, 2012, were as follows: Issued 12,500 shares of $25 par common stock at $32, receiving cash.Issued 2,000 shares of $100 par preferred 5% stock at $105, receiving cash.Issued $400,000 of 10-year, 6% bonds at 105, with interest payable semiannually.Declared a quarterly dividend of $0.45 per share on common stock and $1.25 per share on preferred stock. On the date of record, 85,000 shares of common stock were outstanding, no treasury shares were held, and 17,000 shares of preferred stock were outstanding.Paid the cash dividends declared in (d).Purchased 5,500 shares of Kress Corp. at $22 per share, plus a $275 brokerage commission. The investment is classified as an available-for-sale investment.Purchased 6,500 shares of treasury common stock at $35 per share.Purchased 36,000 shares of Lifecare Co. stock directly from the founders for $18 per share. Lifecare has 112,500 shares issued and outstanding. Everyday Products Inc. treated the investment as an equity method investment.Declared a 2% stock dividend on common stock and a $1.25 quarterly cash dividend per share on preferred stock. On the date of declaration, the market value of the common stock was $40 per share. On the date of record, 85,000 shares of common stock had been issued, 6,500 shares of treasury common stock were held, and 17,000 shares of preferred stock had been issued.Issued the stock certificates for the stock dividends declared in (h) and paid the cash dividends to the preferred stockholders.Received $24,500 dividend from Lifecare Co. investment in (h).Purchased $62,000 of Nordic Wear Inc. 10-year, 6% bonds, directly from the issuing company at par value, plus accrued interest of $550. The bonds are classifed as a held-to-maturity long-term investment.Sold, at $42 per share, 2,600 shares of treasury common stock purchased in (g).Received a dividend of $0.65 per share from the Kress Corp. investment in (f).Sold 500 shares of Kress Corp. at $26.50, including commission.Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization was determined using the straight-line method.Accrued interest for three months on the Nordic Wear Inc. bonds purchased in (l).Lifecare Co. recorded total earnings of $205,000. Everyday Products recorded equity earnings for its share of Lifecare Co. net income. Back to Top [View PDF] P. 709 [Click here to add Bookmark] The fair value for Kress Corp. stock was $18.50 per share on December 31, 2012. The investment is adjusted to fair value using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 2012, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data below and on the following page were taken from the records of Everyday Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2012, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 84,000 and preferred dividends were $85,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2012. c. Prepare a balance sheet in report form as of December 31, 2012. Income statement data: Advertising expense $ 125,000 Cost of merchandise sold 3,650,000 Delivery expense 29,000 Depreciation expense and office buildings and equipment 26,000 Depreciation expense and store buildings and equipment 95,000 Dividend revenue 3,575 Gain on sale of investment 2,225 Income from Lifecare Co. investment 65,600 Income tax expense 128,500 Interest expense 19,000 Interest revenue 1,800 Miscellaneous administrative expense 7,500 Miscellaneous selling expense 13,750 Office rent expense 50,000 Office salaries expense 165,000 Office supplies expense 10,000 Sales 5,145,000 Sales commissions 182,000 Sales salaries expense 365,000 Store supplies expense 22,000 View PDF Retained earnings and balance sheet data: Accounts payable $ 195,000 Accounts receivable 543,000 Accumulated depreciation and office buildings and equipment 1,580,000 Accumulated depreciation and store buildings and equipment 4,126,000 Allowance for doubtful accounts 8,150 Available-for-sale investments (at cost) 110,250 Bonds payable, 6%, due 2022 400,000 Cash 240,000 Common stock, $25 par (400,000 shares authorized; 86,570 shares issued, 82,670 outstanding) 2,164,250 Dividends: Cash dividends for common stock 155,120 Cash dividends for preferred stock 85,000 Stock dividends for common stock 62,800 Goodwill 510,000 Income tax payable 40,000 Interest receivable 930 Investment in Lifecare Co. stock (equity method) 689,100 Investment in Nordic Wear Inc. bonds (long term) 62,000 P. 710 Merchandise inventory (December 31, 2012), at lower of cost (FIFO) or market $ 780,000 Office buildings and equipment 4,320,000 Paid-in capital from sale of treasury stock 18,200 Paid-in capital in excess of par and common stock 842,000 Paid-in capital in excess of par and preferred stock 150,000 Preferred 5% stock, $100 par (30,000 shares authorized; 17,000 shares issued) 1,700,000 Premium on bonds payable 19,000 Prepaid expenses 26,500 Retained earnings, January 1, 2012 8,708,150 Store buildings and equipment 12,560,000 Treasury stock (3,900 shares of common stock at cost of $35 per share) 136,500 Unrealized gain (loss) on available-for-sale investments (17,750) Valuation allowance for available-for-sale investments (17,750)

Explanation / Answer

Requirement 1 S. no Account titles Debit Credit a Cash $400,000 Common Stock $312,500 Paid-In Capital in Excess of Par-Common Stock $87,500 b Cash $210,000 Preferred Stock $200,000 Paid-In Capital in Excess of Par-Preferred Stock $10,000 c Cash $420,000 Bonds Payable $400,000 Premium on Bonds Payable $20,000 d Cash Dividends $38,250 Cash Dividends Payable $38,250 Cash Dividends $21,250 Cash Dividends Payable $21,250 e Cash Dividends Payable $59,500 Cash $59,500 f Investments-Kress Corp. $121,275 Cash $121,275 g Treasury Stock $227,500 Cash $227,500 h Investment in Lifecare Co. Stock $648,000 Cash $648,000 i Stock Dividends $62,800 Cash Dividends $21,250 Stock Dividends Distributable $39,250 Paid-In Capital in Excess of Par-Common Stock $23,550 Cash Dividends Payable $21,250 85,000 6,500 = 78500 78,500 2% $40 per share = $62,800 78,500 2% $25 par value per share = $39,250 j Stock Dividends Distributable $39,250 Cash Dividends Payable $21,250 Common Stock $39,250 Cash $21,250 k Cash $24,500 Investment in Lifecare Co. Stock $24,500 l Investments-Nordic Wear Inc. Bonds $62,000 Interest Receivable $550 Cash $62,550 m Cash $109,200 Treasury Stock $91,000 Paid-In Capital from Sale of Treasury Stock $18,200 n Cash $3,575 Dividend Revenue $3,575 o Cash $13,250 Investments-Kress Corp. $11,025 Gain on Sale of Investment $2,225 p Interest Expense $11,000 Premium on Bonds Payable $1,000 Cash $12,000 q Interest Receivable $930 Interest Revenue $930 r Investment in Lifecare Co. Stock $65,600 Income from Lifecare Co. $65,600 36,000 shares/112,500 shares = 32% $205,000 32% = $65,600 s Unrealized Gain (Loss) on Available-for-Sale Investments $17,750 Valuation Allowance for Available-for-Sale Investments $17,750 $121,275/5,500 shares = 22.05 5,000 shares ($18.50 $22.05) = -17750 Requirement 2 a EVERYDAY PRODUCTS INC. Income Statement For the Year Ended December 31, 2012 Sales $5,145,000 Cost of merchandise sold $3,650,000 Gross profit $1,495,000 Operating expenses: Selling expenses: Sales salaries expense $365,000 Sales commissions $182,000 Advertising expense $125,000 Depreciation expense-store buildings and equipment $95,000 Delivery expense $29,000 Store supplies expense $22,000 Miscellaneous selling expense $13,750 $831,750 Administrative expenses: Office salaries expense $165,000 Office rent expense $50,000 Depreciation expense-office buildings and equipment $26,000 Office supplies expense $10,000 Miscellaneous administrative expense $7,500 $258,500 Total operating expenses $1,090,250 Income from operations $404,750 Other expenses and income: Dividend revenue $3,575 Interest revenue $1,800 Income from Lifecare Co. investment $65,600 Gain on sale of investment $2,225 Interest expense ($19,000) $54,200 Income before income tax $458,950 Income tax $128,500 Net income $330,450 Earnings per common share: Net income ($330,450 $85,000 preferred dividends)/84,000 common shares = $2.92 b EVERYDAY PRODUCTS INC. Retained earnings statement For the Year Ended December 31, 2012 Retained earnings, January 1, 2012 $8,708,150 Net income for year $330,450 Less dividends: Cash dividends $240,120 Stock dividends $62,800 Increase in retained earnings $27,530 Retained earnings, December 31, 2012 $8,735,680 c EVERYDAY PRODUCTS INC. Balance sheet For the Year Ended December 31, 2012 Assets Current assets: Cash $240,000 Available-for-sale investments $110,250 Less valuation allowance for available-for-sale investment $17,750 $92,500 Accounts receivable $543,000 Less allowance for doubtful accounts $8,150 $534,850 Merchandise inventory, at lower of cost (FIFO) or market $780,000 Interest receivable $930 Prepaid expenses $26,500 Total current assets $1,674,780 Investments: Investment in Lifecare Co. stock $689,100 Investment in Nordic Wear Inc. bonds $62,000 Property, plant, and equipment: Store buildings and equipment $12,560,000 Less accumulated depreciation $4,126,000 $8,434,000 Office buildings and equipment $4,320,000 Less accumulated depreciation $1,580,000 $2,740,000 Total property, plant, and equipment $11,174,000 Intangible assets: Goodwill $510,000 Total assets $14,109,880 Liabilities Current liabilities: Accounts payable $195,000 Income tax payable $40,000 Total current liabilities $235,000 Long-term liabilities: Bonds payable, 6%, due 2022 $400,000 Add premium on bonds payable $19,000 $419,000 Total liabilities $654,000 Stockholder's equity Paid-in capital: Preferred 5% stock, $100 par (30,000 shares authorized; 17,000 shares issued) $1,700,000 Excess of issue price over par $150,000 $1,850,000 Common stock, $25 par (400,000 shares authorized; 86,570 shares issued, 82,670 shares outstanding) $2,164,250 Excess of issue price over par $842,000 $3,006,250 From sale of treasury stock $18,200 Total paid-in capital $4,874,450 Retained earnings $8,735,680 Unrealized gain (loss) on available-for-sale investments ($17,750) Total $13,592,380 Deduct treasury common stock (3,900 shares at cost) $136,500 Total stockholders equity $13,455,880 Total liabilities and stockholders equity $14,109,880

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